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To give some background, I currently live with a couple of friends in a 3 bedroom apartment. The living arrangement is good however I'm tired of not building equity. I've tossed the idea out for two of us to buy a house sometime within the next 1.5 years, as the 3rd wants to continue renting for awhile. To me, the primary advantage of this is that we would both gain equity and could afford a nicer house.

I would like to better understand the risks and benefits of such an arrangement.

Some extra facts:

  • Neither of us have ever owned a home.
  • We reside in NJ
  • We both have good credit
  • I like the idea of using FHA however don't know if you can with 2 individuals that aren't married.
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Sure...if you don't want to be friends anymore. –  Muro May 13 '11 at 18:59
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That's the attitude I don't understand... Please explain –  Levinaris May 13 '11 at 19:07
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What happens when your friend misses a payment? How are the two of you going to split up maintenance work? How do you split maintenance costs? What if he doesn't do as much work on the house as you...will he pay you for the extra work you do? There are a lot of questions like these that should be answered before you jump into something like this with a friend. –  Muro May 13 '11 at 19:12
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Excellent thoughts. We definitely need to agree on how all these unexpected costs will be handled, as well as general maintenance and chores. –  Levinaris May 13 '11 at 19:18
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And what happens when your friend (or you) wants to move out and on with life? What happens to his equity? Are you going to be able to buy him out? What if the house has gone down in value? –  msemack May 13 '11 at 20:05
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8 Answers

No. This amount of money is not appropriate for friends to go in on.

Although you could consider buying a house with a business partner, have the contracts drawn up, see an attorney, read up on the penalties if one of the partners doesn't hold up their end from the law's point of view.

Also, since this is a business arrangement, write and sign all sorts of details regarding the penalties amongst the partners (not just the law) when one person doesn't hold up.

It isn't that you don't have good intentions, or that you couldn't do it just fine if no problems ever happen. The issue is that over the course of a mortgage, which is at least several years, something is very likely to come up. If you and your friend aren't prepared to think about all those issues and how to handle them, you will lose a friend, probably a house and your good credit.

I wouldn't go into business with my best friend because I want him to stay my best friend.

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+1 for being a realist –  JoeTaxpayer May 13 '11 at 23:58
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Sheldon Cooper made it clear –  Kemo May 14 '11 at 12:11
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Unlike others who have answered the question - I have done this. Here is my experience - your mileage and friendship may vary:

I bought a condo years ago with a longtime childhood friend. We did it for all the reasons you mentioned - sick of renting and not building equity, were both young, single professionals who had the money. The market crashed we have both since married and moved on to own other properties with our spouses. Now we rent out the condo as selling in the current market is not doable.. It's not an ideal situation but that is because of the real estate market - not who I bought with.

You need to discuss very openly all of the following scenarios, as well as others I can't think of right now I am sure:

  • What if one of us loses our job or for some other reason can't pay
  • What if one of us just plain wants out, at any time, even if it means we lose $
  • What happens if one of us - God forbid - dies. Who gets the equity or quite possibly the debt?
  • What if we both want out but can't sell? Would we rent? Are we comfortable being a landlord? (this one happend to me)

If you aren't both 100% in sync with these questions then do not do it.

I never understand why some people would buy with a girlfriend/boyfriend but not a good personal friend. You're more likely to have a falling out with your significant other then a long time close friend. My advice, have honest, open conversations, about all possible scenarios. If you feel necessary put somethings down into some sort of legal agreement - with us it was not, and still isn't necessary.

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+1 cause your talking from experience. –  Unkwntech May 14 '11 at 6:18
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+1 for great advice. This IS doable, but it's essential to make sure that both people go in with the same goals and expectations. The details make the difference. –  Tridus May 14 '11 at 11:46
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+1 for bullet-point four - how to handle both wanting out. –  gef05 May 14 '11 at 12:36
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I'll chime in here with the "don't do it crowd." I think it's fraught with ugly possibilities.

However, you may, for various reasons, decide to say, "to hell with it, we'll make it work."

If that is the case, treat it like a business transaction and not an emotional transaction. Work up a binding contract with your attorney for how the two of you will handle issues such as:

  • a missed payment
  • unemployment
  • maintenance
  • breakdown in relationship
  • etc etc etc there are dozens of items to consider

Of absolutely critical importance is the bail-out clause: how will you handle it when one person says, "Sayonara."

None of this ensures a smooth road - god knows I wouldn't do it - but it could help protect your sanity and some of your investment down the road. Good luck.

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Thanks, Jeff. My bad. –  gef05 May 14 '11 at 12:34
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I did this about 8 years ago with a buddy in Chicago for the reasons specified in the original post. As other posters have suggested, we discussed a lot of the same questions listed above, figured out the possible scenarios, and then had a lawyer draw up a contract. We bought a 3 bedroom house, and rented out the 3rd bedroom. Overall, it was a great experience. We both built equity while having a renter pay a third of the mortgage. Plus the property tax and interest on the loan were tax deductible. Compared with renting an apartment, it made us a lot more money. In the end, we sold the house, and split the profits. Assuming you have the personalities to make it work, I say go for it.

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A real life experience. A friend of mine did that with his housemates. They bought a house together as students and it worked for them. The tricky bit is to have a very good contract with your housemates as to how the venture should work.

What if? Somebody can't pay, somebody can't enjoy the house (on an extended trip), somebody wants out (marriage, etc.)

It worked for my friend...

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I'd be curious to compare current rent with what your overhead would be with a house. Most single people would view your current arrangement as ideal. When those about to graduate college ask for money advice, I offer that they should start by living as though they are still in college, share a house or multibedroomed apartment and sack away the difference. If you really want to buy, and I'd assume for this answer that you feel the housing market in your area has passes its bottom, I'd suggest you run the numbers and see if you can buy the house, 100% yours, but then rent out one or two rooms. You don't share your mortgage details, just charge a fair price. When the stars line up just right, these deals cost you the down payment, but the roommates pay the mortgage. I discourage the buying by two or more for the reasons MrChrister listed.

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Sure, form an LLC with an attorney's advice. You need a buyout clause, operating agreement, etc.

If you're not married, never buy a home for personal use with someone else.

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There are lots of good reasons not to do this. HOWEVER if you do decide to, there are four things you need to consider:

  1. How will you deal with one of you not being able to make a payment for months? Would one of you be able to hold up the payments? Would you be able to sell yourself?
  2. Assuming you do need to sell up, how likely are you (together) to have negative equity?
  3. You should arrange it so that your respective shares of ownership are calculated with reference to the amount of money and sweat equity you put in. You will need to think about what the thresholds for valuing contributions that are not purely monetary, how it will be valued, etc. You should probably have a formal accounting process.
  4. What will be your arrangements for selling the house? Inevitably one of you will prefer to sell at a time when the other would not. Will your decision to sell be unilateral, or unanimous? Will it be different based on whether there is a profit expected or not?
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